Building a Human Capital Strategy: Case Study

ProCo is a global and diversified consulting company with strong positions in many areas. The company was enjoying stable profitability because of its traditional service offerings in mature markets, but times were changing. The chief executive officer (CEO) and other executives were concerned about limited growth. They also faced the challenge of developing new growth areas without jeopardizing their successful businesses.

The top management team concurred that in addition to accelerated global expansion, the greatest opportunities for growth required (1) strengthening relationships with the company’s large, profitable customers and (2) more aggressively tapping synergies across service groups and business segments. Those synergies included both cross- selling and developing new services that would provide customers with integrated solutions to business problems. At the core, synergy involved a shift from a product orientation to a customer orientation. That strategy could give ProCo an unassailable competitive advantage for many years and put it on the road to double-digit growth.

Applications of Business Impact Modeling

Business Impact Modeling provides facts about the human capital drivers of business success. It can address a wide range of questions, including the following: Does productivity rise with years of service? What is the impact of customer service training on sales? Is the incentive pay program producing the desired effects? Does employee turnover affect the company’s bottom line? Are the spans of control optimal? What is the impact of part-time employees on the business? Is the leadership development program raising business performance?

Informing a company’s management is exactly what Business Impact Modeling does. It brings new, powerful information to decision makers about human capital attributes and practices. The statistical modeling inherent in the approach gives decision makers greater certainty about what drives business results and what does not. The statistical models also help decision makers anticipate the future, especially the returns (i.e., improvements in business performance) that can be expected to result from a change in a human capital policy or practice. The insights that result from applying this approach significantly improve the ability of an organization to settle quickly and objectively on the strategy and tactics best suited to achieving the desired business objectives.

From Business Strategy to People Strategy

ProCo set out to develop a human capital strategy that could support its new business strategy. As a first step its executives took a hard look at the current workforce and asked, “What are our key skill sets?” “How effective are we at developing them and retaining the people who have them?” “What attracts the right kinds of people to us, and which practices drive them away?” “How strong is our leadership pipeline?” and “How well are we tracking performance and differentiating rewards for top performers?”

The company conducted an ILM analysis to answer those and other workforce questions about its current state. Next, it addressed the future state: “What kind of workforce do we need to make our growth strategy work?” “What would it look like?” The firm’s leadership determined that ProCo needed people with specialized skills to maintain its existing position in traditional service lines. To capitalize on synergies and develop integrated solutions, however, it required something very different: People who knew how to work across specialized functions, get things done through the use of cross-functional teams, and expand customer connections. People with those more general business skills and entrepreneurial attitudes would be needed at all levels, and employees who fit that description would need a long leash and a suitable set of rewards.

Finally, the strategy would require a shift from having a “hiring talent” orientation to having a “building talent from within” orientation. Previously the firm typically had hired experienced talent and let those employees operate as they saw fit as long as they upheld the highest professional standards. The new strategy had very different people implications. Employees would have to unite around distinctive offerings and new proprietary techniques. They would have to be trained in those techniques and broaden their experience within the firm. In a word, the growth strategy called for increasing amounts of firm-specific human capital.

When management compared the desired employees’ qualities with those of the current workforce, several gaps stood out. “If you look at how we’re hiring and promoting people,” said one manager, “it’s clear that we’re attracting and retaining people who want to become technical specialists. People who come to us with generalist skills are not highly rewarded or promoted. They are most likely to leave us. That’s a problem if we want to adopt this new business strategy.” “We need more risk takers,” said another. “But how will we attract and motivate such people when the evidence shows that they’re not rewarded in our company?”

Others chimed in to identify other gaps that would have to be addressed. Indeed, a comparison of the current versus desired the state revealed significant alignment in some areas but important gaps in others. For one thing, the company was hiring significant numbers of experienced midcareer professionals, people who generally did not remain with the company for long. That signaled a problem because of the sums spent on recruiting and selecting such people. Worse, that pattern was inconsistent with the new business strategy, for which homegrown talent was the linchpin.

Another drawback of hiring experienced professionals was the effect on up-and-coming junior talent. ILM analysis indicated that many of the younger people were leaving, especially in units with significant senior hires. Perhaps those less-experienced professionals saw few opportunities for promotion. The facts, however, showed that this was not the case. Promotions were valuable but had no effect on retention among promising young professionals. Pay alone seemed to matter. This was a shock to senior management in light of the considerable attention given to advancement in the organization. In short, the company inadvertently was creating a pay culture rather than a career culture, the exact opposite of what it needed if it was going to build homegrown talent successfully. In fact, many of the essential human capital requirements of the firm’s strategy were not supported by the rewards system.

On the basis of those assessments, a team of managers, executives, and HR specialists met to create a new human capital strategy, a coherent set of recommended changes in the company’s employee policies and practices. Those changes included new hiring objectives and plans for targeted retention, training, and rewards.

Major shifts in management practices are difficult to make when a company is successful and has a deeply engrained culture. In the case of ProCo, the existing businesses were doing well but the newer parts had yet to establish their economic viability. How could one argue in favor of substantial reallocations of resources from those who clearly drove the current business to those who might drive the business in the future? This is a conundrum for many businesses. Everyone is prone to rest on his or her laurels, and with boards looking over one’s shoulder, building human capital for future needs can be very risky if it comes at the expense of current performance.

ProCo, however, took the plunge, but not before taking one more step to ascertain whether its vision of the future was valid. It wanted to know which human capital attributes and management practices were critical to the success of its new strategy. Of particular interest was the staffing of client service teams. Were certain staffing arrangements better than others? To answer that question the firm brought together revenue data maintained by the finance department and HR data for the most recent 12 quarters. Business Impact Modeling then estimated the impact of different staffing configurations on revenue growth. Control variables such as differences in individual team members’ performance levels were included in the analysis.

The results were powerful and often counterintuitive. For example, there had been an unquestioned belief that teams staffed with the most experienced members of the firm were the most effective. Business Impact Modeling indicated something very different: Teams of highly experienced employees were not nearly as effective in growing revenue as were teams made up of employees with varying years of service and experience.

Other findings confirmed existing beliefs but also quantified and prioritized their links to results. Turnover among team members, a source of discontinuity in client relationships, clearly detracted from revenue growth. The impact of turnover on revenue growth was greatest among the more tenured employees. Also, the greater the “dedicated” staffing in service teams—that is, team members spending a majority of their time serving a single client—the greater the ability of the team to increase revenue. Although the directionality of this effect was long assumed by management, the magnitude of its importance was unknown. In fact, the magnitude of the effect of dedicated staffing far exceeded the effect of employee turnover.

Finally and perhaps most important, teams composed of employees from different service groups were far more likely to expand client relationships than were teams that focused exclusively on a single service segment. Revenues increased faster when the first staffing model was in effect. Thus, the economic potential for blended service teams became visible within current patterns of performance. The business case for the new strategy of broader client relationships was there for all to see, and human capital was at its center.

The ILM Analysis/Business Impact Modeling Combination

The approach described in the ProCo case confirms the value of combining ILM analysis, Business Impact Modeling, and qualitative assessments of the current and desired states. A clear picture of current workforce realities derived from an ILM analysis and the identification of drivers of value derived from Business Impact Modeling provided new facts and dispelled old myths. Leaders who get involved in the details of the design of a human capital strategy understand their organizations at a much deeper level. They become more acutely aware of the human sources of competitive advantage. They also discover metrics they can use to track progress on the people side of the business.